Volatility erupted in the currency market after the United States officially entered a technical recession in the second quarter of 2022 and the energy crisis in Europe is keeping inflation high. This follows the Fed’s second consecutive 75 basis point hike, for the first time since Paul Volcker’s tenure in the early 1980s.
Today, currency flows moved towards the Japanese yen (JPY), which confirmed its role as a hedge against the recession by outperforming the dollar by 1.5%. USD/JPY fell to ¥134.4, breaking below the month-to-date lows at the close of the European market.
The Swiss franc (CHF) also appreciated amid increased safe-haven flows, gaining 0.5% and 0.8% against the US dollar (USD/CHF) and the euro, respectively. (EUR/CHF).
The Greenback (DXY Index) had a fairly volatile session, first surging towards the resistance at 107 levels, only to see a pullback in the 106.4-106.5 range after the release of negative US GDP data .
The Euro (EUR/USD) fell back to 1016 (-0.4% on the day) after hitting an intraday high of 1023 earlier in the day. Negative macro impressions for the Eurozone have affected sentiment towards the single currency, as we explain below.
Growth concerns weighed on commodity currencies. WTI oil fell slightly on the day (-0.7%), failing to clear the resistance level of $100 a barrel. After registering a gain of 1.7% the day before against the dollar, the Norwegian krone (NOK) fell by 0.4% today. The Australian dollar (AUD/USD) also fell 0.4% and the Canadian dollar (CAD) fell 0.3%.
Currency Strength Matrix – July 28, 2022
Live chart USD/JPY (US dollar/Japanese yen exchange rate)
EUR/USD Update: German Yields Fall More Than US Treasuries, Widening US/EU Rate Spread
Let’s start with the multitude of negative news affecting the Eurozone.
The Eurozone Economic Sentiment Indicator (ESI) fell for the fifth consecutive month in July 2022, to 99, the lowest since February last year, from 103.5 in June and below expectations of the market of 102. In the past, the A ESI below 100 was a very reliable predictor of a recession in the Eurozone.
Annual inflation in Germany fell slightly to 7.5% in July 2022, from 7.6% in June, when markets expected a decline of 7.4%, but remained close to its highs of several decades. On a monthly basis, inflation increased by 0.9% month on month in July 2022, after rising by 0.1% in June and beating market expectations by 0.6%.
What is your sentiment on AUD/USD?
Vote to see the sentiment of traders!
German yields fell 23 basis points on the day for the 2-year maturity to 0.22% and 15 basis points for the 10-year Bund to 0.80% on fears of an impending recession in the eurozone.
The United States enters a technical recession in the second quarter, with preliminary GDP estimates indicating that the economy contracted by 0.9% (annualized rate qoq), against +0.5% expected and a decline of 1.6% in the previous quarter. Treasury yields fell 10 basis points across the curve, with the 2-year yield at 2.9% and the 10-year yield at 2.66%, as the market repriced future rate hikes of interest.
According The latest Fedwatch tool from CME Groupinvestors currently expect the fed funds rate to be around 3.3% at year-end and early 2023, followed by lower rates in the first half of 2023.
The short-term yield gap between the US and Europe is widening as the market believes the ECB will have to stop raising interest rates much sooner than the Fed. If this trend continues, it could put additional downward pressure on the EUR/USD exchange rate.